Index-linked freight contracts risk steering the logistics industry toward optimising rates rather than supply chains, according to Dr Raymon Krishnan, president of Singapore’s Logistics & Supply Chain Management Society, in a commentary published by Splash247.
Why index-linked contracts rose
Krishnan argued that index-linked contracts address long-standing challenges of traditional fixed-rate agreements. He wrote that by allowing freight rates to move in line with market conditions, these contracts reduce the need for constant renegotiation, improve pricing transparency and lessen the likelihood of contractual disputes when markets become volatile. During the covid pandemic, he noted, many shippers holding long-term contracts found themselves unable to secure space as spot rates climbed, making fixed-price contracts commercially unsustainable. Index-linked pricing emerged as a practical solution because it automatically adjusts rates with market movements, keeping contracts commercially relevant whether prices rise or fall.
The risk: price becomes the product
Krishnan, who said he has spent more than 30 years in the industry as a freight forwarder and shipper and now works as a consultant and educationist, asked whether the industry is solving one problem while unintentionally creating another.
The greatest risk of index-linked contracts is that often they reinforce an industry-wide obsession with freight rates.
Krishnan argued that index-linked pricing rewards volatility rather than cushioning against it, whereas traditional long-term contracts were designed to smooth market fluctuations. Instead of encouraging conversations around carrier capability, operational excellence, schedule reliability, equipment availability, customer service and supply chain resilience, the freight index becomes the centre of every commercial discussion. In effect, he concluded, price becomes the product.
What this means for procurement teams
Krishnan explained that the shift could have profound implications for how procurement teams evaluate solution partners. For many procurement professionals, he wrote, the main measure of success centres on whether a rate sits above or below an industry benchmark, rather than whether the partner consistently delivers the outcomes that matter most to customers, both internal and external. The table below summarises the differences between fixed-rate and index-linked approaches as described in the Splash247 commentary:
| Contract approach | Key characteristics per Krishnan |
|---|---|
| Traditional fixed-rate | Designed to smooth market fluctuations; became commercially unsustainable during the pandemic when spot rates climbed, leaving contracted shippers unable to secure space. |
| Index-linked | Automatically adjusts rates with market movements; reduces renegotiation, improves transparency, lessens disputes; but rewards volatility and shifts focus toward benchmarks. |
Krishnan warned that if executive discussions become dominated by indices, benchmarks and pricing models, the industry may lose sight of capabilities that genuinely differentiate world-class supply chains. The list he highlighted includes:
- Schedule reliability
- Forecast accuracy
- Digital integration
- Inventory optimisation
- Risk management
- Carbon reduction
- Operational resilience
Shifting commercial relationships
Drawing on his experience as a logistics manager during the global financial crisis in 2007–2009 and again during the pandemic in 2020–2023, Krishnan said he has always advocated that successful shipper-carrier partnerships are built upon mutual trust, actual volumes and long-term planning. Both parties accepted that markets would fluctuate over time, but the relationship itself provided stability through those fluctuations. He cautioned that instead of reinforcing commitment through shared objectives, index-linked pricing can encourage a more transactional mindset where the commercial relationship becomes increasingly tied to an index. He reminded readers that freight is a derived demand, existing to move cargo efficiently through increasingly complex global supply chains, and its purpose is not simply to optimise freight pricing.
Watch list
Krishnan suggested that the next evolution in logistics contracting should not focus exclusively on how freight prices are set. His watch list for the industry includes the seven capabilities above, alongside a return to partnerships based on trust, actual volumes and long-term planning. Whether shippers and carriers adopt those broader metrics alongside index-linked pricing will determine if the industry optimises supply chains rather than just freight rates, according to the Splash247 commentary.
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